It is no question that FHA is getting worse and worse to deal with. On April 1st, 2012 what used to be a 5 year requirement for already expensive mortgage insurance, will be changing to a 30 year requirement for FHA loans. Forget the 78% LTV requirement, or having 20% equity in your home. It simply does not matter. What does matter is that YOU, the home buyer are educated about your options, as you prepare to navigate the increasingly complex mortgage maze. The following example is of a real client who would like to put an offer on a home him and his wife found this week.
Purchase Price is $335,000
Down Payment FHA 3.5% minimum - $11,725
Rate - 3.75% Principal and Interest - $1523.34
Monthly Mortgage Insurance Premium - $336.74-------------------Starting April 1st, 2013, will be on there for 30 years. Only way to eliminate is another refinance to conventional loan at 80% LTV or better
Payment - $1860.08
Regardless of this borrowers down payment and wanting to get into this property, clearly the Mortgage Insurance Premium with FHA is a major Red Flag. This is money you are throwing out the window. Now granted, if you are a low FICO score borrower, have a spotty credit history, and are in a period of getting your life back on track, this might be the only option you have for a couple of years. Conventionally, however if you have great credit, and no prior bankruptcies in the last couple of years, or foreclosures in the last couple of years, you should really look at the alternative. The following is an alternative option to an FHA mortgage with even less of a down payment.
Purchase Price is $335,000
Down Payment Conventional 3% minimum- $10,050
Rate - 4.75% Principal and Interest - $1724.75
Payment - $1724.25
FHA used to be an amazing way to get home-buyers into properties at low rates, and low down payments, and it still is, however it is by no way, the end all, be all. Mortgage Insurance rates on FHA loans have gone up at least 7 times in the last 5 years, and will be going up AGAIN on April 1st. This example is to just show you that there ARE options out there other then FHA loans.
So here are the benefits of this conventional alternative.
1. Save $135.83 a month
2. Avoid MI payment which is not tax deductible
3. Keep $1675 in your bank, avoid the additional .5% down payment, going with FHA
The only caveat here to pay attention to here, is that these loans want high credit score borrowers for these programs. Less down payment, no mortgage insurance, but of course more risk. You will need to be a credit worthy borrower to participate for this loan, however it is not something that you cannot achieve. Time cures all with everything, and I would rather spend a month helping a home buyer fix their credit, then throw them into an FHA loan, when they could have gotten something better.